Chris Lau - Seeking Alpha

Monday, February 09, 2009

Assessing Impact of Proposed U.S. Stimulus Package

The unemployment figures for January in the U.S. was startling. Despite these figures, the stock market rallied. From past patterns in stock activity, this is a bullish signal, to a limited degree. The bullishness last week signals that a "bottom" may have been reached.

I would contend that a market bottom won't be known yet, because it cannot ever be predicted. Bottoms are only known after the fact. It would also be more prudent for the investor to wait for a S&P 500 re-test of the bottom @ 741.02 reached last November.

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The market is pricing in the stimulus package. It is almost impossible for the market to refuse to rally, since both the allure and the injection of a massive amount of money into the economy will necessarily result in a higher market index. Investors would be wise to remember that when money is printed, U.S. debt must be sold. There must be a buyer. That buyer is China and Japan, along with other foreign countries.

Being bearish on TLT would be one of many investment ideas I have discussed in past entries.

Is the Stimulus Package Enough?

The stimulus spending bill in Congress is supposed to create 3.7 million new jobs. However, the assumption is that each new dollar of government spending will generate $1.50 to the economy. This calculation is made with a GDP multiplier of 1.5. This multiplier was estimated by the Federal Reserve’s FRB/US model.

To paraphrase:"Production and work create GDP, so it is more accurate to say that 1 million more jobs produce 1 percent more GDP.”

If a GDP multiplier of 1.5 is a constant for all government spending, then why don’t they propose spending $10 trillion to make us $15 trillion richer?"

Analysis:

The stock market is assuming that the flow of funds from the stimulus package will result in an increase of 150% in economic output.

The market fails to do is recognize:

1) Who is consuming the added debt2) The funds will not result in 1.5x, because the funds are being used for an assortment of investments that will not impact GDP output (example: covering bank losses)

Calculation of Lost Wages

Below is a line table of lost income based on total and monthly unemployment of 7.6% in the U.S. Assume the figures provided by Bloomberg are appropriate, in that average wage would most accurately represent lost annual wages.

Note:- Severance has not been factored in.- Cost reductions for companies have not been factored in.

Title:Item Number)ValueDetails

1)3,570,000Total Unemployment, U.S.

2)$614.72Weekly Average Wage, @39.8/hrs

3)598,000January Unemployment, U.S.

4)$114,116,620,800 - ie $114B/yr Total lost income (annualized) @7.6%

5)$19,115,333,120 - ie $19B/yr Total lost income (annualized) for jobs lost in January 2009

6)Spending Multiplier = GDP / Change in Investment - What good is this? There are too many unknown variables!

8)$210,012,940,800 i.e. $210B / yrTotal lost income if 6,570,000 jobs are lost by December 2009

I haven't applied a GDP spending multiplier to it yet, for the reasons mentioned previously. There are too many assumptions that will make economic cost estimates accurate. In addition, the impact on GDP will be higher since income has a direct impact on the economy. This will make any impact estimates very inaccurate.

So, in the above I used only the calculation, annualized over 12 months:

# Unemployed x Average U.S. Income x 52 weeks

...and for item #8, calculated the cost to the economy by December 2009.

The point of this calculation is to illustrate that investors must monitor the unemployment rate in the coming months. Investors must then weigh it against current and future stimulus policies. Investors must not look at US$827B and assume that amount will result in US$827B consumption. The banks remain the known unknown "black hole" in this equation. Just how much government money is still required to shore up bank balance sheets remains largely unknown.

Blog Site Update and Creation of kaChing Discussion Groups

First, I have created two groups to help readers become better investors.

Intelligent Investing - Benjamin Graham taught Warren Buffett how to invest. He was worth $62B as of December 2008. While he employs a "buy and hold forever" approach, this group will focus on the securities analysis approach for holdings worth to make that list. The goal for members here will be to make the elite list and to perform above the average user on kaChing. Concept and practice is based on the book "The Intelligent Investor" by Benjamin Graham.

kaChing has created an API (Application Programming Interface) to allow bloggers and sites to link their portfolio. See top of page. This will give more freedom and transparency to not only the users on kaChing, but for bloggers such as myself. With 145 followers, users will want openness in the rationale between an evolving investment thesis and the actions taken to achieve an investment goal.